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Goldfinder – Mr Bond Considers the Latest Issues

This has been the most prolific year to date for the retail bond market since the launch of ORB in 2010.

In excess of £1.5 billion has been raised from the sixteen launches to date in 2012, although the recent cancellation of the planned launch by Stobart Group indicates that this is not an unalloyed licence to thrill for issuers and investors.

Attempts to provide an ‘apples and apples’ comparison of recent issues highlights the large number of variables that can affect the attractiveness of a bond. Issuers have to ensure that the price they come to market at is a fair reflection of the historical and projected performance of the business, the assets against which the loan is secured and, where applicable, the independent rating of the offer.

The latest offerings from inter-dealer broker Tullett Prebon and schools provider Alpha Plus offer retail investors a nice contrast in asset risk to choose from and are both worth considering carefully.

Appearing less attractive?

Tullett Prebon's bond is a straightforward unsecured bond with a 5.25% semi-annual coupon maturing in June 2019 and is the second to arrive on the ORB market from a financial broker after the 5.5% launch by ICAP which launched in July.

With Tullett Prebon and ICAP operating in a broadly similar sector, the fact that the coupon offered by the former is 0.25% lower may make it appear less attractive.

However, trading in the ICAP bond in the secondary market has been below par with the bond yield falling to about 5.3% which effectively wipes out the differential between the two.

Investors considering either of the of these companies may be attracted to the relative certainty offered by their retail bonds, as share prices for inter-dealer brokers have been extremely volatile over the last six months.

The reason for this is that trading volumes across most asset classes are down, except for certain areas of fixed income, which has a negative effect upon the commission that inter-dealer brokers earn from transactions; this led to the issue of a profits warning from ICAP earlier this year.

As reported by Retail Bond Expert on 27th November, the other bond designed to tempt retail investors is a 5.75% issue from educational provider, and self-styled ‘Gold Standard in Education’, Alpha Plus Schools.

Secured Bond

In contrast to the recent series of launches from property-based businesses, this bond is the first on the market to be secured against £84m of underlying assets, putting the bonds right at the top of the debt pyramid on a par with senior bank debt.

Alpha Plus runs high-end schools in central London and is owned by the DV4 evergreen fund and advised by Sir John Ritblatt's Delancey real estate development company. The company needs cash for expansion after a big increase in pupil numbers in London over the past few years.

The coupon on offer is better than many of the recent unsecured offerings, and the company’s cash profits are approximately three times the cost of this debt.

Retail Bond Expert exists to ensure that retail clients make educated and informed decisions when choosing to purchase retail bonds as part of their investment portfolio, and the contrast between these issues offers much food for thought.

Tullett’s reputation and credit rating may provide a compelling argument for investing in the business and the relative volatility of its equity price may make its retail bond a more predictable way of doing so; the modest 5.25% coupon may be considered a worthwhile price to pay for such certainty.

However, the fact that the Alpha Plus Group’s bond is secured against its assets could be of considerable interest to those seeking a 5.75% coupon with high levels of security.

If you have any thoughts or comments regarding anything you see on Retail Bond Expert or indeed would like to add any market context or other debate, we would invite you to contribute via the Comments section below, as we believe that together we will make better investment decisions.